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Analyzing Short-Run Income Models and Production Possibilities

Explore short-run income models and production possibilities in economics, including Keynesian and regional income multipliers, location quotients, and input-output analysis. Learn about technical coefficients, Leontief matrix, Input-Output Multipliers, and Shift-Share Analysis. Discover the Esteban-Marquillas Extension and policy implications. Study open economy models, finding multipliers, and Interregional Dependencies. This comprehensive guide delves into various economic theories and practical analyses.

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Analyzing Short-Run Income Models and Production Possibilities

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  1. Short-Run Income Models Chapter 7 1

  2. Production Possibilities Curve 2

  3. Two linear production possibilities curves showing comparative advantage 3

  4. Keynesian Model • Y = C + I + G + (X−M) • C = a + bYd, • Yd = Y−T • M = d + mYd • Exogenous Spending: (a + I + G +X –d) 4

  5. Regional income multiplier • Marginal Propensity to consume locally: (b – m) 5

  6. Location Quotients 6

  7. Interpreting Location Quotients • LQ > 1: export industry • LQ = 1: produce for local consumption • LQ < 1: import industry 7

  8. Employment Multiplier 8

  9. Calculating Basic Employment 9

  10. Direct, indirect and induced effects on a production possibilities curve 10

  11. Input-Output Analysis • Total output (by rows): Xi = zi1 + zi2 + . . .  + zii + . . .  + zin + Yi • Total spending (by columns): • Xj = z1j + z2j + . . .  + znj + Vj = 11

  12. Buyers Sellers 12

  13. Technical (or direct) coefficients • Technical (or direct) coefficients (aij) • Technical coefficients show the quantity of output from each industry needed to produce final demand (the first round effect) 13

  14. Table of Technical Coefficients 14

  15. Leontief matrix and powers • Direct effect is represented by [I−A] • Direct effect + Indirect effect: I−A + A2 + A3 + . . . + An • The production needed to satisfy an increase in final demand (X): multiply the vector of final demand (Y) by the inverse of the Leontief matrix, X = [I−A]−1 Y 15

  16. Table of Multipliers 16

  17. Input-Output Multipliers 17

  18. Shift-Share Analysis • dij = gij + mij + cij, • gij = Eij0 rB, • mij = Eij0 (riB – rB) • cij = Eij0 (rij – riB) • (Eij0 is the number of employees in industry i within region j during time 0) • dij = Eij1 – Eij0 18

  19. Shift-Share Analysis 19

  20. Esteban-Marquillas Extension • Redefine Competitive Effect: cij′ = E′ij0 (rij– riB)where E′ij0 is homothetic employment: • E′ij0 = Ej(EiB/EB) • Allocative effect: aij = (Eij0 – E′ij0) (rij – riB) • Specialization effect (Eij0 – E′ij0) • Measure of comparative advantage (rij – riB): 20

  21. Policy implications of Esteban-Marquillas extension 21

  22. Short-Run Model of an Open Economy • E = C + I + G + (X – M) • In equilibrium, income (or output or actual expenditures) = Desired Expenditures: Y = C + I + G + (X – M) • C = a + bYd • Yd=Y – T • T = tY • M = d + mYd. 22

  23. Finding the multiplier • E = • a+ b (1 – t)Y + I + G + X – (d + m (1 – t) Y) • E = (b – m) (1 – t) Y +(a +I +G +X – d) • Since in equilibrium, Ye = E, 23

  24. Keynesian Cross 24

  25. Modeling Interregional Dependencies • Two regions c (core) and p (periphery) • Yi = Ci + Ii + Gi + (Xi−Mi) • Ci = ai + bYdi • Ydi=Yi−Ti • Ti = tiYi • Mi = di + mYi • Xc = Mp; • Xp = Mc 25

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